There have been several false dawns in Japan over the years and share prices have fallen as well as risen quite dramatically at times. The unusual situation we currently see is that despite many companies looking fundamentally healthy, it remains an unpopular market with investors. We believe it could be worth a closer look. Read on for details.

There is much to be positive about. The Japanese banking sector has little exposure to the credit crisis. Indeed Japan experienced its own financial crisis in the 1990s and has emerged leaner and fitter having learnt from past mistakes.

Across the Japanese market takeovers and management buy outs (MBOs) abound. This is usually a sign of a buoyant economy as it means there is plenty of cash available to finance growth. Takeovers are generally positive because it allows companies to streamline their operations and cut costs. MBOs give the management a financial stake in the future of the company, so provide them with a far greater incentive to perform than salaried employees.

Company profits are substantially higher today compared to five years ago and we think the Japanese market is trading at its most attractive level in 25 years. Japan was one of the best performing major markets in April and May. This is of course a very short time frame, but we feel there is still further to go. Japanese shares are currently yielding more than government bonds. When this has happened before, as circled on the graph below, in each case this was followed by a strong rally in the market.

Photo Source: JO Hambro

Companies are also currently growing their dividends by an average of 20% per year, compared to the UK where the figure is around 5%. Of course the Japanese market is not without significant risks. It is only relatively recently that Japan shrugged off the deflation that dogged their economy for so many years, so a major global slowdown could prove detrimental. Investors should also remember that a strengthening yen has improved returns to foreign investors recently; if it were to weaken returns would suffer.

In our view the Japanese market is long overdue a recovery. While there are no certainties, it appears the first shoots of recovery may be emerging and we feel it could be an excellent time to invest. If you are considering an investment in Japan we would highlight the Jupiter Japan Income and JO Hambro Japan funds.

Jupiter Japan Income

Japan may seem like an unusual place to for investors seeking income. However with dividend growth currently at 20% per annum and the potential for capital growth we feel it could be an opportune moment to consider this fund.

Read Hargreaves Lansdown’s factsheet on Jupiter Japan Income

If you are looking for an out and out growth fund this is one of our favourites investing in this region. The manager, Scott McGlashan, believes that the Japanese market is poised for a recovery and we feel this fund could be an excellent way to benefit.

Read Hargreaves Lansdown’s fact sheet on JO Hambro Japan

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